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EARLY LAST YEAR, just as the pandemic was starting, we were looking to buy a new home in an area where houses sold quickly—but we feared selling our existing home would be far slower. In addition, home prices in the new area were substantially higher.
We had no first mortgage on our existing house and no desire to take one out for the new home. Still, we wanted to strike quickly if we found the right place to buy, and that would mean coming up with cash at short notice. I began to consider which investments to sell. Problem is, selling would mean triggering taxes and potentially missing out on investment gains, so we wanted to limit the amount of investments we sold—which we did by borrowing the maximum possible on our HELOC, or home equity line of credit.
HELOCs can play a crucial role as part of a family’s emergency plan. But they can also be used to transfer equity from your current home to a new house. We had a 10-year line of credit as an emergency source of funds. We hadn’t tapped the HELOC during the first nine years we had it. But last year, it was the emergency cash we needed—even if we weren’t facing a true emergency.
By borrowing the full amount allowed by the credit line, we reduced the amount of investments we had to sell. It worked like a charm: We were able to buy the new house for cash. Our investments continued to grow, while we paid minimal interest on the borrowing. As soon as our old home sold, we repaid the loan.
Intrigued by our strategy? Make sure you apply for the HELOC while you still have a paycheck coming in—because you’re far more likely to be approved.
I keep on reading about HELOCs and as someone with less than two years to my planned retirement the recommendation to apply for a HELOC while I am still working spurred an investigation into the process and the costs. We have a rather fiscally conservative lifestyle, mortgage long-retired, and have not paid interest in years. But we are planning a series of incremental home improvements and having access to additional funds as needed would be a plus. The HELOC closing costs seem to range between $2,000 and $5,000. This seems like a lot of money to have something ready “just in case”. Are my numbers incorrect?
I agree with Jonathan. We set up a new HELOC in our new home this year. Zero closing costs or fees and no required borrowing. They did offer an incentive to borrow at the closing, but there was no requirement. Shop around.
That doesn’t sound right. Last time I checked, it cost nothing to set up a HELOC, though many banks charge $50 a year for the privilege and some insist you borrow some initial amount, perhaps $5,000.
We dealt with a similar situation by borrowing from our 403(b) and paying off the loan as soon as we sold our old house.
I agree HELOCs are a very valuable financial management tool and every responsible homeowner should have one set up. Mine is very helpful in particular for managing income and taxes. If we need extra funds in a particular year and don’t want to sell any taxable investments or draw from one of our IRAs we go to the HELOC.